Succession Planning through Trusts

A trust is a legal instrument created by the owner of the assets, generally known as the settlor/author of the trust, gives or entrusts another party, known as the trustees, the right to hold title to the property or assets for the benefit of a third party, known as the beneficiary. These arrangements are used for various purposes to achieve specific goals and are one of the most efficient tools of succession planning in India.

This instrument is used for numerous purposes to achieve specific goals and is one of the most popular ways considered to transfer the assets of a person to an underage beneficiary and by those in family run businesses to ensure that legacies remain alive and keep up with challenging times with minimum conflict or impact on business.

The law relating to private trusts was codified in 1882 as the Indian Trust Act, 1882. The Act is applicable to the whole of India, except under the state of Jammu and Kashmir and the Andaman and Nicobar Islands. It is also essential to note while creating a Trust to not affect with the rules of Mohammedan law or with the mutual relations of the members of an undivided family as determined by any customary or personal law. The provisions of the Trust are not applicable to public or private religious or charitable donations.

A Trust is an effective way of succession planning as the owner of the assets can see its implementation during his lifetime, whereas succession planning through a testamentary Will takes place only after the demise of the owner of the assets. A Trust henceforth helps the settlor or the owner to correct mistakes if any and take proper actions in timely manner. Another advantage of Trust is that it provides united control and effective participation of all members in the decision-making process thereby mitigating disputes and legal battles among the members.

The statutory formalities in relation with the Trust are also minimal thereby making Trust to operate easily with no heavy regulations. The instrument is governed by a Trust deed and the information on a private Trust is not available to the public, providing privacy and security.

A Trust deed consists of the intention of the author to make the Trust, the purpose for which the Trust has been created. Any monetary asset of a Trust is assigned for the advantage of the Trustee. It also gives control or transfer the Trust property to the trustee which incorporates the intention of the author. A Trust deed can also be drafted in such a way that the Trustee can claim expenses and salary from the proceeds of the Trust for the work he/she has done in the Trust.

Parties of a Trust Deed

A Trust deed consists of:

• Settlor/the owner of the assets.
• Trustee: A trustee is a neutral third party who holds the legal title to the property on behalf of the beneficiaries. A Trustee is assigned with the task of ensuring and upholding the terms of the Trust deed and to act in the best interests of the beneficiary. The Trustee may also be given the authority to initiate the foreclosure process and the sell the assets to recover any outstanding debts. The powers bequeathed upon the Trustees should be well defined. If multiple parties are assigned a clear information should be given on everyone’s duties and responsibilities in the trust agreement.
• Beneficiary: A beneficiary is a person who benefits from the Trust. When a Trust is created as a part of the succession planning, one should take great care when determining who should inherit the ownership of the assets.
  
• A Protector and an Advisory Board: To guide the Trustees in the proper exercising of their administrative and dispositive powers. They also ensure that the wishes of the settlor are fulfilled, and the Trust is able to continue to serve the purpose for which it was intended.
  

The trust can be further be categorized into testamentary, specific (determined) or discretionary, revocable or irrevocable.

Specific or discretionary Trusts are adopted based on the distribution pattern. If the Trust deed provides a list of beneficiaries specifying their beneficial interest it would be a specific Trust. If the Trust deed does not specify any beneficiary’s share, but empowers the Trustees to determine such share, it is considered as a discretionary/indeterminate Trust.

Of the types of Trust, the most commonly used is the irrevocable Trust as in an irrevocable Trust for the purpose of succession planning as the settlor does not have the power to retain or reassume the Trust property or income. i.e., the settlor is prohibited from transferring the assets back to himself as the property now belongs to the Trust. This type of Trust provides adequate protection to the assets against the claims of the creditors, or to protect the assets in case of a bad divorce.

Cross border administration of estate through Trusts

A trust can also be used as a cross-border administration of estate. Indian residents can set up a trust at any point in their lifetime and settle into it any Indian asset they want their family members, including Non-residents to inherit. Non-residents can be made beneficiaries to their Indian trusts and receive distributions in their NRO accounts. When current income like interest, dividend or rent generated by the trust is distributed to the beneficiary’s NRO account, it retains the character of a current income. A Non-resident’s entire family including spouse and children can be named as the beneficiary.

One of the main advantages of this instrument is that the assets need not transfer through succession and Non-resident heirs can avoid the tedious court processes and other legal procedures that might be required for inheriting the assets.

Under a Trust can hold any kind of assets that a person owns, considering the scenario where many families hold assets overseas, such as shares or immovable property. For any such assets to be transferred to a Trust, or if any of the family members are non-residents, the provisions of the Foreign Exchange Management Act, 1999 along with the laws of the country where the assets are located should be considered.